If you believe that health insurance companies will really go broke if they don’t get 20% premium increases during a deep recession, raise your hand. Ah, the one hand I see raised is Karen Ignagni’s. She’s the top lobbyist for the health insurance industry, and president of America’s Health Insurance Plans. She’s pleading for Congress not to regulate health insurance rates, no matter how bad her clients look to the rest of us. All we need to do, in her view, is trust the insurance industry’s own math.
Ignagni’s over-the-top argument appears this week in the National Journal, while the Wall Street Journal reports that insurers are directly blaming requirements of health reform for up to 9 percentage points of a new round of double-digit premium increases, right before November elections. Federal estimates put the actual cost of new benefits as diverse as flu shots and guaranteed acceptance of children at 1% to 2% of premiums.
There’s no doubt that, as Ignagni sort of notes, that the health reform law should have done more to curb underlying health cost–though it was Ignagni’s own AHIP lobby that killed the most effective cost control, a Medicare-style public option. But the key code phrase in Ignagni’s argument is "actuarially justified." As in:
"Rates that are actuarially justified should be deemed reasonable."
Yet there is no connection between actuarially justified and reasonable.
Health insurance actuaries make mathematical predictions of what a certain policy will cost insurers in the future, based on certainties like policyholders’ age and uncertainties like overall medical cost trends. Then the company picks a number for the next premium increase, including overhead, administration, profit and executive salaries. But running the numbers past a group of actuaries doesn’t make a premium reasonable or justified. It’s just a tool, and can easily be used to "justify" rates that are way out of whack, like the 39% rate increases that Blue Cross of California withdrew after examination by California regulators.
Some of the Blue Cross problem was math errors. But the company also, in emails obtained by Congress, appeared to be padding the rate as a cushion in case regulators complained. Still, the actuaries paid by Blue Cross gave Blue Cross their stamp of actuarial justification.
“Actuarial soundness” has been
debunked by industry experts as a meaningless term. In 2008
testimony on behalf of the Personal Insurance Federation of California,
Association of California Insurance Companies and American Insurance
Association, former Department of Insurance Actuary Shawna Ackerman
"There is no such criteria as ‘most actuarially sound’ in the actuarial
community, actuarial literature or the Actuarial Standards of Practice.
Ratemaking is prospective in nature, projecting the costs of events yet
to occur. Thus, there will necessarily exist a range of reasonable
choices, not a single ‘most actuarially sound’ choice."
So if the only criterion for whether a premium is reasonable is that it be declared actuarially "sound" or "justifiable," the insurance industry is free to charge what it wants.
That, in fact, is the state of things in California, where a misbegotten last-minute bill using exactly the insurance industry’s language on actuarial justification passed on the last day of the session. And an effective bill to regulate health insurance didn’t. You could almost predict the votes by how much each legislator got from the $800,000 the insurance industry recently contributed in the state Senate.
California is a bellwether for the nation. You can bet the the insurance lobby’s wording on actuarial justification is popping up in other state legislatures, including in states that currently regulate rates. Even better than preventing regulation, in the lobbyists’ eyes, is getting rid of regulation on the books.